Our focus is the e-cigarette impact, which we’ll go through below, however of note upfront is how surprisingly mild the proposed rules are – our work with most major e-cigarette manufacturers suggested they were expecting even more “deeming” regulations.

We view today’s proposed regulations as having no negative impact on Lorillard (LO), our preferred tobacco stock, and in some cases may benefit the larger e-cigarette manufacturers.

What’s in the Proposed Regulation?

Manufacturers must register with the FDA and report product and ingredient listings. Producers would also be subject to FDA inspections

Manufacturers may only market new tobacco products after FDA review, but would have two years after the new rules are finalized to do so -- in the meantime companies can keep their products on the market

Ban on the sale of e-cigarettes, cigars and pipe tobacco to anyone under 18 (requiring people buying them to show photo identification to prove their age, measures already mandated in a number of states)

Manufacturers would no longer be able to offer free samples

E-cigarettes would have to come with warning labels saying that they contain nicotine, which is addictive

Companies would not be able to assert that e-cigarettes are less harmful than real cigarettes unless they got approval from the F.D.A. to do so by submitting scientific information

No sales of e-cigarettes in vending machines in public places where minors are allowed

What Wasn’t Touched in the Proposed Regulation?

No proposal to ban flavors in e-cigarettes and cigars

No move to restrict the marketing of e-cigarettes

No proposal to ban online sales, only age verification

The proposed regulation is likely step 1 as the FDA tries to better understand the science of e-cigarettes, user trends, and to get the ball rolling on regulation after dragging its feet on a proposal for many months. This proposal is now open to a public comment for 75 days, and then the agency will make final changes, a process that will likely be counted in months.

We view today’s proposals, even if they all become final, as positive for our bullish call on Lorillard and its e-cigarette blu:

The regulations could serve to consolidate the industry given the FDA registration and ingredient requirements

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